Setting up an offshore company to save tax in the UK is not always an effective solution and can sometimes cost more to run than any tax that is saved.
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The idea is that if an offshore company generates income from UK assets, the tax paid overseas will be at a lesser rate than that in the UK.
However, the UK government is becoming increasing tough on cracking down on suspected tax savings made this way and incorporating offshore can spring some tax traps for the unwary,
Running costs
Setting up an offshore company can cost several thousands of pounds and many offshore centres demand the company has a local resident director and someone to administrate the company affairs. Offshore company administrators are aware of this and can charge thousands of pounds a year to provide the service knowing the company owners have no choice but to pay their fees.
Tax residence
Just because a company is based offshore does not mean it is not tax resident in the UK.
This means any earnings and gains are subject to corporation tax. If the management and control of an offshore company is proved to be based in the UK, wherever the company is based makes no difference to any liability for corporation tax.
Management and control are considered to take place where the company’s day-to-day business activities are generally undertaken.
Double jeopardy
The UK has double taxation treaties with many countries that mean tax is not paid on the same income or gains in the UK and the country where a company is based. However, if no treaty is in force, the tax authorities at both ends may demand tax on the same earnings and gains.
Trading base
Even if the day to day management of a company takes place outside the UK, any profits or gains arising from a place of business or the work of an agent in the UK are taxable in the UK. This is under the rules of permanent establishment.
Multinationals can avoid these rules by holding stock for fulfilment here while running the business from an offshore base, but the government is looking at changing the law to tax profits generated in the UK regardless of where a company has a business base.
Power to enjoy
One offshore corporate pitfall is when a UK resident transfers assets overseas but still has the right to enjoy those assets or the money they generate.
Close companies – where 50% of the company is owned by five or less shareholders – also present a problem with some complicated rules for dealing with income and gains.
Offshore benefits
Many of these tax traps do not apply to company owners living outside the UK, but the advantages may come at a price if they are non-doms bringing money into the country on a remittance basis.
Holding property or other expensive assets in an offshore country can also take them outside of the reach of UK inheritance tax rules.
Wealth warning
Setting up offshore to save tax in the UK often looks a good idea, but can have unforeseen financial consequences if the company inadvertently flouts tax rules, so always seek professional tax advice in the UK and the financial centre where the company is based before going ahead with your plans.
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